In a recent article published in Tax Notes, DLA Piper’s Tom Geraghty, Michael Greenberg and John Wei addressed the tax treatment of indemnification payments made under a representation and warranty insurance policy and the costs for acquiring that insurance. They concluded that “indemnification payments made under an R&W insurance policy may sometimes result in income to the insured without an offsetting deduction. In those circumstances, the insured may be able to rely on Freedom Newspapers and related authorities to treat indemnification payments as a purchase price adjustment. Purchase price adjustment treatment would appear to be particularly appropriate where the purchase of R&W insurance is a condition to closing.
An insured will generally have to capitalize the costs of an R&W insurance policy. Whether amortization deductions will be available will depend on whether the policy should be considered a separate asset and, if not, whether the underlying business transaction is a stock or asset acquisition.”
Read the full article here.